Estimating Management Practice Complementarity between Decentralization and Performance Pay

39 Pages Posted: 20 Jan 2015

See all articles by Bryan Hong

Bryan Hong

New York University (NYU) - Leonard N. Stern School of Business

Lorenz Kueng

Northwestern University - Kellogg School of Management; University of Lugano - Faculty of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mu-Jeung Yang

University of Washington - Department of Economics

Date Written: January 2015

Abstract

The existence of complementarity across management practices has been proposed as one potential explanation for the persistence of firm-level productivity differences. However, thus far no conclusive population-level tests of the complementary joint adoption of management practices have been conducted. Using unique detailed data on internal organization, occupational composition, and firm performance for a nationally representative sample of firms in the Canadian economy, we exploit regional variation in income tax progression as an instrument for the adoption of performance pay. We find systematic evidence for the complementarity of performance pay and decentralization of decision-making from principals to employees. Furthermore, in response to the adoption of performance pay, we find a concentration of decision-making at the level of managerial employees, as opposed to a general movement towards more decentralization throughout the organization. Finally, we find that adoption of performance pay is related to other types of organizational restructuring, such as greater use of outsourcing, Total Quality Management, re-engineering, and a reduction in the number of layers in the hierarchy.

Suggested Citation

Hong, Bryan and Kueng, Lorenz and Yang, Mu-Jeung, Estimating Management Practice Complementarity between Decentralization and Performance Pay (January 2015). NBER Working Paper No. w20845. Available at SSRN: https://ssrn.com/abstract=2551653

Bryan Hong (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

Lorenz Kueng

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
+1 (847) 491-7843 (Phone)
+1 (847) 491-5719 (Fax)

HOME PAGE: http://www.lorenzkueng.com

University of Lugano - Faculty of Economics ( email )

Via Giuseppe Buffi 13
CH-6900 Lugano, CH-6904
Switzerland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mu-Jeung Yang

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

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